Dollar Rally Fizzles As Markets Bet On The Fed's Pause

(RTTNews) - The Dollar declined against most currencies during the week ended June 9 as renewed hopes of a pause by the Fed sent the Dollar scurrying for cover. The Dollar depreciated against the euro, the British pound, the Australian Dollar as well as the Japanese Yen.

The Dollar Index or DXY, a measure of the Dollar's strength against a basket of 6 currencies declined 0.43 percent during the week spanning January 5 to 9. The DXY finished the week's trading at 103.56 versus 104.01 at the end of the previous week. The DXY which had touched as high as 104.40 on Monday dropped to a low of 103.29 on Friday before rebounding a tad ahead of the end of trade.

The Dollar's weakness was primarily attributed to growing expectations of the Fed pausing on its interest rate hiking cycle. Data released on Monday had shown the U.S. Services PMI drop to 50.3 from 51.9 in the previous month, contrary to expectations of a rise to 52.2 percent. Data released on Thursday showed the number of Americans filing for unemployment benefits jumping to 261 thousand in the week ended June 3 versus the previous reading of 233 thousand and expectations of 235 thousand, triggering renewed expectations of a pause by the Fed.

Expectations of an easing in inflation exacerbated the greenback's retreat. The annual inflation in the U.S. is seen falling to 4.1 percent in the month of May, from 4.9 percent a month earlier whereas core inflation is seen declining to 5.3 percent from 5.5 percent in the month of April. Month-on-month inflation is seen falling to 0.2 percent, from the level of 0.4 percent recorded in the previous month.

The Dollar's losses were limited by the safe haven demand triggered by disappointing trade and inflation readings from China that questioned the depth of the post-pandemic economic rebound in China. Surprise rate hikes by the Bank of Canada and the Reserve Bank of Australia also contributed to uncertainty over the Fed's likely course of action. The action by the SEC against the cryptocurrency industry also supported the Dollar.

The U.S. Dollar depreciated 0.38 percent against the euro during the week ended June 9 amidst expectations of another rate hike by the ECB in the forthcoming review. The single currency strengthened to $1.0747, from $1.0706 a week earlier. The EUR/USD pair strengthened over the course of the week, rising from the low point of 1.0667 touched on Tuesday to the high point of 1.0788 touched on Thursday as the hawkish stance of the ECB drove currency market sentiment in favor of the Euro.

The GBP/USD pair strengthened close to a percent during the week ended June 9, finishing trade at 1.2569, versus 1.2448 a day earlier. The pound sterling mirrored the movements in the Dollar though on an inverse basis. The pound strengthened steadily over the week's span, rising from the low of $1.2368 on Monday, to the high of $1.2592 on Friday as markets priced in aggressive rate hikes by the Bank of England. The pound's gains were however limited by the decline in the Halifax House Price Index.

The AUD/USD pair rallied close to 2 percent during the week ended June 2, rising to 0.6739 from 0.6611 a week earlier, helped by the surprise rate hike by the Reserve Bank of Australia and the potential for more rate hikes. The pair increased steadily, rising from the low of 0.6579 touched on Monday to the high of 0.6752 on Friday. The rate hike sentiment helped limit losses amidst weak trade and inflation data from China.

The U.S. Dollar depreciated a little less than half a percent versus the Japanese yen. The pair dropped from the high of 140.47 touched on Monday to the low of 138.75 touched on Friday. The yen's prospects were boosted after revised data showed a spurt in the economy's GDP in the first quarter, rising to 0.7 percent, from 0.1 percent earlier. Expectations of the government's intervention to support the yen also supported sentiment for the Japanese currency.

Markets now look forward to the release of U.S. CPI data on Tuesday and the Fed's policy outcome and commentary on Wednesday. The probability assigned to a quarter percent rate hike by the Fed in the ensuing review, as implied by the 30-Day Fed Funds futures pricing data sourced from the CME FedWatch tool has fallen to 21.8 percent, from 29.9 percent a day earlier. It stood at 24.1 percent a week earlier. The FOMC would also be unveiling the economic projections that would be keenly watched by the currency markets as well.

In this scenario, the Dollar Index has edged up to 103.59. The EUR/USD pair is at 1.0751 whereas the GBP/USD pair has dropped to 1.2512. The AUD/USD pair is at 0.6745. The USD/ JPY pair has increased to 139.66.